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Market Report: Thomas Cook retreats despite talk of Tui tie-up

The clouds refused to shift from above Thomas Cook yesterday, as the tour operator continued its trip south despite City scribblers mulling over the possibility of a tie-up with Tui Travel.

After losing almost 30 per cent of its share price on Tuesday following a profit warning, Europe's second-largest travel company extended its sell-off last night, dropping 3.4p to 84.45p. With the group at its lowest level since it was created by the 2007 merger of Thomas Cook AG and MyTravel, talk was doing the rounds that it could now be vulnerable to an aggressor.

Morgan Stanley, meanwhile, suggested a merger between the group and its mid-tier rival Tui Travel – down 2.7p to 202p – could help both in a "market increasingly dominated by the online players and independents". It added that such a deal would not face regulatory issues "on the basis that the holiday market is now much broader than the narrow package market definition".

"Alternatively, we could see one of the operators merging with one of the low cost airlines," said the broker, "bringing the best of the low cost carriers... with the best of the tour operators (access to beds)".

However, Morgan Stanley's analysts clarified that they remained "cautious" on the sector, saying "traditional package holidays seem to be seeing an accelerating market share loss to independent holidays" as they cut Thomas Cook's target price to 100p.

"More worrying, we forecast Thomas Cook will come close to its debt covenants in the next six months," they said, before warning that "while we don't think it's that bad, market leaders have collapsed before".

Positive GDP figures from China, which also saw the biggest growth in its industrial production for over a year in June, meant the miners pushed the FTSE 100 up 37.47 points to 5,906.43, with encouraging hints from the Federal Reserve chairman Ben Bernanke on the likelihood of further quantitative easing measures also helping.

Kazakhmys and Randgold Resources ticked up 52p to 1,365p and 225p to 5,440p respectively, while Fresnillo advanced 80p to 1,520p after the silver producer revealed it was planning to double its output from its Saucito mine in Mexico by 2016.

BSkyB started the session in the red, and when the announcement that News Corp had pulled its bid came through, the broadcaster dropped even further, touching a low of 663.5p. However, its weakness was short-lived, and with plenty of support for the company even without a bid, it ended up closing 13.5p ahead at 705.5p.

"This news although expected, allows some of the uncertainty to go away regarding the mess with News Corp," said Guardian Stockbrokers' Atif Latif, who added that it was "worth at least 850p a share on a standalone basis".

Vague takeover mutterings around BAE Systems were being reheated, although traders rubbished the chitter-chatter. The defence giant was lifted 6.8p to 305.8p after having declined more than 5 per cent over the last three sessions, with Northland Capital Partners' Zeg Choudhry saying its recent weakness meant it was "due a bounce or relief rally of some sort".

An important day for the retailers saw a number of big names releasing updates, including Marks & Spencer. The high street institution was knocked back 9.2p to 363.8p despite its underlying sales over the first quarter rising 1.7 per cent, as it warned it expected "trading conditions to remain challenging".

The luxury end of the sector, however, continued to impress thanks to Burberry – 94p better off at 1,531p – which beat sales expectations for the first quarter. However, the most dramatic rise came from SuperGroup which shot up 184.5p to 1,062p on the mid-tier index. The fashion company revealed a jump in its annual profits of around 90 per cent, and added that its growth strategy was "on track".

EasyJet continued its recent descent, slipping back 2.6p to 321p to extend its fall over the last six sessions to more than 12 per cent. The budget airline dropped after its founder Sir Stelios Haji-Ioannou – who owns over a quarter of the company as well as the "easy" brand – attacked its management for not getting shareholder approval for a recent aircraft order.

Saying the dispute "makes it clear that easyJet's relationship with its major shareholder has deteriorated further", Numis Securities' Wyn Ellis warned that "the future strategy of the company is in doubt" and cut his advice on the group to "reduce".

The recent unseasonably good weather in Switzerland was blamed by Global Brands – which runs the Domino's Pizza franchise in the country, as well as in Liechtenstein and Luxembourg - for a slowdown in the group's sales over the second-quarter as the penny stock was pegged back 0.38p to 2.38p on the Alternative Investment Market, a slide of nearly 14 per cent.